Drilling Down on Success: M&A in the Oil & Gas Services SectorA corporate roundtable hosted by HSBCIn March 2017, treasurers shared their experiences of M&A, discussing the practical implications of M&A, the challenges, and how to overcome them.

Drilling Down on Success: M&A in the Oil & Gas Services Sector

A corporate roundtable hosted by HSBC

M&A is critical to many organisations’ growth strategy, not least in the oil and gas industry. As a result, major one-off M&A transactions and/or a larger number of smaller ones is a common challenge for many treasurers. In March 2017, HSBC hosted a flagship event for oil and gas services clients in Houston, USA. The event featured an engaging roundtable discussion, an edited version of which appears below, in which treasurers shared their experiences of M&A, discussing the practical implications of M&A, the challenges, and how to overcome them.

Top Tips: Preparing for M&A

Maintain good relationships with key partner banks to preserve access to funding and liquidity, and leverage their experience and new ideas on how best to anticipate and finance M&A;

Communicate regularly with the Board and CFO on the group’s financing capacity, including potential impact on debt/ equity ratios, covenants and credit ratings;

Maintain robust relationships with credit rating agencies, including communicating regularly on strategy, so both parties understand the impact of M&A on credit ratings;

Maintain a register of key information and reporting that is typically required in the case of M&A, including bank accounts, signatories, letters of credit, guarantees etc. and perform regular housekeeping. This avoids delays and additional project risk during M&A integration.

Financing the Acquisition

OK Azie, Baker HughesTreasury plays a key role in M&A from the very start, as the company first needs to be able to finance the acquisition. You need strong banking relationships and flexible credit facilities with appropriate capacity, potentially with the opportunity to set up bridge loans. We tend to model our debt capacity every year so we can report to the CFO on our debt capacity for any strategic initiative based on our credit rating metrics.

Melissa Cougle, EnscoThe scope of M&A transactions can vary significantly, and therefore the funding levels required will also vary. Internally, it is important to work with the CFO to stay in tune with M&A strategy as much as possible and use the time before a transaction is announced to explore capital structure alternatives. Externally, developing relationships with your banks is key, so that they better understand your business and you are up to date on access to credit. Equally important, it is essential to assess liquidity levels regularly, not only to meet today’s requirements, but with an eye on the future too. Partner banks have a vital role to play in this, and could have innovative ideas around funding and liquidity that you may not have considered.

Lance Kawaguchi, HSBCAbsolutely. By building strong relationships between treasury and the bank, the relationship manager can serve as an advocate for the customer within the bank. A bank’s credit committee, for example, may not appreciate the difference between an offshore driller, an oil field service company, and a pure exploration and production (E&P) company, which have different risk profiles. The better the bank understands a customer’s business, and the nuances of its risk profile, the more specific the bank’s credit decisions can be.

M&A Integration in Practice

Once an M&A transaction has concluded, the scale and complexity of the integration process will depend on factors such as the size of the transaction, the degree of similarity in the target company’s business model (e.g. payables and receivables), banking partnerships, account and liquidity models, technology infrastructure, business culture and a wide range of other considerations. The location of the business will also have a bearing on the process.

Lance Kawaguchi, HSBCAn acquisition of a relatively small business with 50-100 bank accounts can be integrated quite quickly, certainly in terms of account structures and controls, but this becomes far more complex in the case of a larger acquisition. Even so, it is important to gain a rapid view of credit agreements, indentures, exposures, hedges, cash balances, etc., to help guide the transition process. Some companies choose to maintain an M&A checklist that covers everything from bank account lists to letters of credit, guarantees, etc., so that information is readily available when required.

OK Azie, Baker HughesBank account and signatory management pose particular risks in the context of M&A. Opening and closing bank accounts needs two signatories in our organisation and must be approved by the treasurer. We have around 1,000 accounts globally, and this typically increases during an M&A event, so maintaining signatory lists is very challenging. When changing a bank account signatory post-acquisition, there are piles of paperwork to sign, which then need to be couriered to the relevant countries, creating cost, delay and the potential for loss or fraud. Then you find out that something different is required, and the whole process starts again.

This can create significant risk during M&A transactions, so treasurers spend a lot of time on administration, rather than the liquidity and risk decisions that result from the transaction. This could prevent you making the salary payment run, settling treasury transactions or making interest payments on debt. That won’t be a comfortable discussion with your CFO.